Writing the first in a new series of guest blogs for the Institute of Credit Management (ICM), serial entrepreneur James Caan suggests that small businesses need to act to remove the barriers to payment and he urges smaller businesses to take more responsibility for their own actions in getting paid, and to consider alternative funding mechanisms in order to keep the cash flowing.
And James is quite right; not only are many SMEs under-capitalised, but many do not have what could be deemed as basic housekeeping mechanisms in place. Simple things such as obtaining a written purchase order, acknowledging that written purchase order and attaching some basic terms of business, all help to ensure the ability to enforce payment. A delivery note is also essential, as are clear payment terms on the invoice, backing up the payment terms originally agreed. The number of businesses that fail to do these tasks is quite surprising.
Now that the banking world has changed and, it is the opinion of many, is unlikely to return to the operational ways we all became used to in the past, the ways in which we generate working capital needs to be re-thought.
No longer is it a simple process to obtain an overdraft or term loan, and if there is little headroom being generated by way of profits, the likelihood of succeeding is low.
Looking to other means of cash generation is essential and that means considering asset based lending; principally invoice or receivables finance. One of the by-products of borrowing money in this way is that the simple mechanisms mentioned above form part of the package – invoice financiers like paper trails. It enforces a discipline and helps streamline a process. Often linked with credit insurance, the whole business becomes more secure and there is less likelihood of bad or un-collectable debts.
Invoice finance does, unfairly, sometimes get bad press. Often deemed expensive, many businesses continue to overlook the real value of enhancing their working capital in this way. Not only does it add a discipline to the way in which the business functions, it grows in line with sales turnover. Immediate cash upon delivery becomes the norm and a business can often grow far more quickly than if it had opted for a static overdraft. Used properly, the cost can be off-set by considering renegotiating payment terms with suppliers, gearing up to accept larger orders from customers, and therefore probably buying raw materials more cost effectively, in bulk. And what price does one place on growth?
The key for all businesses seeking funding though is in choosing an adviser who understands the finance market and which banks/lenders offer what products. At usually no cost to them, businesses can work with an independent adviser who will tap into the wide reaching network of financial providers, both in the equity and debt markets, and find the right funding solutions appropriate to their individual needs. They will also check the small print to help to avoid any tricky issues further down the line!
At Smart Factoring Quotes, we understand that choosing a finance partner is not a ‘one size fits all’ exercise. We match the most suitable products to each individual circumstance and we work together to ensure compatibility and satisfaction, adding value to your business or client relationship.